Dividends4Life: Stock Analysis: Wells Fargo & Company (WFC) A Buy on Dips

Linked here is a PDF copy of my detailed analysis of Wells Fargo & Company (WFC) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Wells Fargo & Co provides banking, insurance, investment, mortgage and consumer finance services throughout North America.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
WFC is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, WFC is trading at a 7.1% premium. WFC had a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
WFC earned two Stars in this section for 3.) and 4.) above. WFC has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 21 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
WFC earned both of the available Stars in this section. The NPV MMA Diff. of the $14,568 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as WFC has. WFC's current yield of 4.99% exceeds the 4.61% estimated 20-year average MMA rate.

Other: WFC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. WFC has a strong customer base and a well diversified capital base. Recently, WFC prevailed in a legal dispute with Citigroup (C) over its planned purchase of Wachovia (WB). This will provide WFC exposure in the fast growing southeasten portion of the U.S. WFC should to continue to gain market share. WFC risks would include credit deterioration spreading to some of its other asset classes.

Conclusion: WFC lost one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks WFC as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $32.59 and WFC's NPV MMA Diff. would still be around the $7,500 NPV MMA Diff. that I like to see. At that price WFC would yield 3.99%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate
the $7,500 NPV MMA Differential I'm looking for, the calculated rate is 6.0%. This dividend growth rate is slightly below the 8.7% used in this analysis.

What a difference a few days makes. When I selected WFC for an analysis it was a 5 Star-Strong Buy, then its price increased above the 5% premium level and lost a net of 2 Stars. If I was looking to open or add to a position in WFC, I would wait for it to dip below $26.44.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in WFC (0.0% of my Income Portfolio) .

What are your thoughts on WFC?

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  1. Anonymous // October 15, 2008 at 11:20 AM

    In a recent book I read (Good to Great), it talked about how WFC was one of the rare companies that managed to turn itself into a great company with strong pride and ownership by employees, a culture where management sincerely wanted the business to become the best even if they no longer held a position as well as other factors. I can see why Buffett is a long time holder of WFC and it's close to getting on my shopping list.

  2. Nurseb911 // October 15, 2008 at 12:37 PM

    This is my only direct investment in a US financial stock (aside from GE's financial arm) and I chose it because of quality. It hasn't been immune from all the problems, but I've always liked the company and they've been very busy acquiring new insurance businesses under the radar of many investors. The WB acquisition will certainly provide them with decent long-term growth, but they'll still have an uphill battle against the larger firms such as BAC in 10 years or so.

  3. Anonymous // October 15, 2008 at 6:55 PM

    Jae Jun: There was a short window when WFC was in my buy zone ($26.44) around the close on the 9th and open on the 10th. Unfortunately, I had invested all of October's cash then.

    Brad: WB will give them access to whole new area of the country.

    Best Wishes,

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